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Oil price could fall to $70 in 2012 amid volatility, Shell warns

Oil prices could fall to $70 a barrel during 2012, from current levels above $110, as high volatility in the economy and energy markets becomes “a fact of life”, Royal Dutch Shell executives said.

By Emily Gosden: 3 February 2012

The oil giant unveiled its 2011 results on Thursday, with a 54pc jump in full-year profits to $28.6bn (£18.1bn).

High oil prices helped to compensate for a tough fourth quarter in which Shell reported a loss in its ‘downstream’ refining and marketing division.

Shell’s chief executive, Peter Voser, outlined an aggressive long-term growth strategy, focused on ‘upstream’ exploration and production. He said the strategy would help Shell ride out volatility and increase cash flow by up to 50pc over the next four years. It would spend $30bn in 2012, with more than 60 projects under construction and in design.

“The global economy and energy markets are likely to see continued high volatility,” he said, due to a combination of robust structural growth and “unprecedented geopolitical events” such as the Japanese earthquake, eurozone crisis and the Arab spring.

“Both volatile macro and volatile earnings are now a fact of life for our industry,” he said. “We deal with this by staying focused on longer-term trends.”

Mr Voser said Shell used “conservative ranges” in its assumptions about oil prices to assess risk when planning projects, to ensure they break even – even if prices fall. “We plan inside a $50-$90 range for oil,” he said.

Discussing the $50-$90 planning range, Simon Henry, Shell’s chief financial officer, told analysts: “I’m not sure we see it right at the bottom of that one over the next 12 months, but we could certainly see it in the middle of that range,” he said.

However, Mr Henry said that the company’s target of up to 50pc cashflow growth in the next four years was based on oil remaining above $80.

“Our cash flow from operations was $136bn for 2008-2011, over the four year period during which the average oil price was $87,” he said. “In the next four years we are expecting cash flow from operations to be 30pc to 50pc higher than that, around $175-$200bn in four years, assuming $80-$100 Brent oil prices.”

Shell’s results were slightly below expectations, which had already been lowered recently as the extent of the downturn in the refining industry became apparent.

Fourth quarter earnings for 2011 on a current cost of supply (CCS) basis – the oil industry’s preferred measure that strips out inventory value changes – were $6.46bn, down 11pc on the previous quarter, but up 13pc on the same quarter in 2010. It saw a $278m loss in downstream in the quarter, compared with a $482m profit in the same period of 2010.

Mr Voser said: “Our fourth quarter results were impacted by a sharp downturn in industry refining margins and North American natural gas prices.”

Shell said it planned a dividend for the first quarter of 2012 of $0.43 a share, up 2pc on the first quarter of 2011 but below some expectations.

It also said it had sold a 20pc stake in a Canadian shale gas project to PetroChina, in a deal estimated to be worth $1bn. Shares closed down 28.5p at £22.97.



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